Hundreds of thousands of private landlords could be encouraged to invest in new housing if changes were made to the way the sector is taxed.

The economic case for doing so is compelling. Analysis by the Residential Landlords Association (RLA) of figures produced by DCLG has revealed that 57 per cent of the over five million new dwellings created between 1986 and 2012 have been private homes to rent.

In 2011, research conducted by Professor Michael Ball from Reading University revealed that the annual tax paid on rental income in England alone amounted to around £3.5 billion.

On average this amounts to around £1,000 per tenancy being passed on to the Treasury in tax.

For all the siren noises about landlords enjoying substantial tax breaks, this ignores the fact observed by Professor Ball that the private rented sector is taxed in ways not faced by other housing tenures and that “the tax burden on the private rented sector is rising fast”.

For example, unlike other housing tenures, landlords pay Capital Gains Tax at a typical rate of 28 per cent when they sell their properties; and 20 per cent VAT is charged on the market services that landlords buy, such as estate agents’ fees or on repairs, which they cannot claim back.

Landlords are also double taxed on building improvements as they have to pay VAT on them and then are taxed on the higher rents that the improvements generate. Owner occupiers do not incur so many costs since they are not in the business of supplying tenant services.
All of this combines to deter many landlords from investing in further properties at a time when demand is rising.

The basic problem is that the Treasury has always treated renting as a private investment activity and not as a business. With the sector now having overtaken social renting in size it is time that this was changedm and for renting to be rightly regarded as a very serious business.

Taxing private renting as a business would enable changes to be made to its tax treatment which would encourage the almost 90 per cent of landlords who are individuals to invest in new homes. The RLA is proposing a series of steps that the Chancellor could take in his Budget on the 8th July. These include:

Roll-over relief for Capital Gains when re-invested: To encourage landlords to re-invest, roll-over capital gains tax (CGT) should be allowed where the sale proceeds are being re-invested in a property for rent. Landlords are traditionally good at regenerating property, but they need the ability to move with the market and release capital without CGT liabilities.

Relief from Capital Gains when sold to a first-time buyer: To help first-time buyers and free up rental property, relief from CGT should be allowed where the sale is to a first-time buyer, with suitable controls to prevent abuse, such as an upper limit on price.

Entrepreneur relief for CGT: This would bring the sector in line with other businesses and encourage disposals where the proceeds are not to be re-invested. This, together with the rollover reliefs proposed, would result in a turnover of properties with more being refurbished.

Capital Allowance: Properties devalue as they are lived in and periodic refurbishments are essential if property standards are to be maintained. The tax system currently allows no relief for re-investment and improvement until, and only if, a sale is eventually made. There should be a capital allowance for enhanced repair and refurbishment.

VAT relief for build to rent – construction of a new dwelling: VAT can be reclaimed on goods and services in connection with the construction of a new dwelling when it is a place where someone is intending to live. This also applies to the conversion of a non-residential building into a dwelling. It is an anomaly that a VAT refund cannot be claimed on such work if the building is being let.

Combined, these proposals would not lead to a loss of revenue to the Treasury since they would bring many unoccupied properties into use, so generating fresh income. They would also bring forward tax allowances, many of which would otherwise be claimed at a later date.

One of the impacts would be to lead to a greater turnover of property, generating stamp duty, but also this is the time when extensive refurbishment is common. This will lead to other income being generated.

Figures suggest that every £1 invested in the sector provides a return to the economy of £3.50 through expenditure on building work and furniture. On average, a sum equivalent to ten per cent of the purchase price of a property bought for renting is spent on renovating it.

Our proposals have the potential to significantly change the private rented sector and enable it play a substantial part in meeting the housing challenge for the new Government.